Phase II Fully Enrolled

On July 7, 2010, Nile Therapeutics (NLTX) announced it had completed enrollment in its phase II program at 77 patients.

The phase II program, NIL-CDNP-CT005, is an open-label, single-blind, placebo-controlled study designed to assess the safety and tolerability of 4 doses of CD-NP (1.25, 2.5, 3.75, and 5.0ng/kg/min) when infused for up to 72 hours in patients with acute decompensated heart failure (ADHF) and mild to moderate renal insufficiency.

Nile will also study additional endpoints, including an assessment of symptom relief and effects on biomarkers of heart failure and renal function. The trial enrolled patients in the U.S., Israel and Germany.

Data Q4-2010

Final patient dosing should complete by the end of July 2010. Management commented that based on preliminary data, the doses with the most attractive clinical profile are looking to be the 1.25ng and 2.5ng doses. A total of 20 patients were enrolled at each of the 1.25ng and 2.5ng doses. These doses seem to present the lowest risk of hypotension.

Management also enrolled 10 patients at 3.75ng and several patients at 5.0ng, so we believe that the company will have an excellent safety and tolerability curve to present to the U.S. FDA upon study completion. We expect to see top-line data from this program in the third quarter 2010, with full data to be presented at the end of the year. Our best guess would be at the American Heart Association (AHA) meeting in mid-November 2010.

The next steps for management are to finalize the design of a double-blind, placebo-controlled phase IIb study and to discuss that trial design with the FDA and other regulatory authorities. We expect this program to enroll roughly 300 patients, with endpoints to include relief of symptomatic dyspnea, as well as analysis of biomarkers for kidney function and ischemia, as well as safety assessments including risk of hypotension, renal function, cardiovascular events, and mortality. The cost of this planned phase IIb program is estimated to be between $15 and $20 million.

Cash Position OK for Now

In April 2010, Nile Therapeutics offered 6.5 million units of securities in an underwritten public offering for $0.70 per unit. Each unit consists of one share of NLTX common stock and 0.3 warrants to purchase common stock at anytime over the next five years for $0.94 per share. The warrants began trading on the Nasdaq Capital Market under the symbol NLTXW.

In May 2010, Nile announced that underwriters have exercised their option to offer an additional 975k units, bringing the total size of the offering to 7.475 million units. Through the offering, Nile Therapeutics raised approximately $4.5 million in net proceeds.

We believe this is sufficient cash to fully fund the ongoing phase II program, and provide enough cash runway to allow management to present the full data in the fourth quarter 2010 and strike a developmental partnership for CD-NP in late 2010 or early 2011. Our financial model predicts Nile will have an estimated $4+ million in cash on hand at year-end 2010.

Staying Positive

We see a significant market opportunity for CD-NP. There are an estimated 1.2 million hospitalizations each year in the U.S. with the primary admission cause of acute decompensated heart failure (ADHF). Nearly three-quarters of these patients also have stage II or stage III chronic kidney disease (CKD). The majority (~75%) present with a systolic blood pressure (SBP) above 120 mmHg and would be eligible for treatment with a vasodilator. A product specifically indicated for the treatment of patients with ADHF with mild to moderate CKD, which is safe to use on top of Lasix, could have significant sales potential.

We think if CD-NP can demonstrate effectiveness in the planned phase IIb, Nile can fetch at least $300 million on a takeover in 2011 or 2012. However, shareholders may not have to wait that long to reap their rewards. Our expectation is that management will look to secure funding from a partner after the phase II data comes out later this year. We could be looking at an upfront payment plus potential takeover milestones in 2011.

What is clear to us is that with a market capitalization of only $11 million, Nile Therapeutics shares are bafflingly under-valued. We believe with positive data in hand, the company is worth at least $80 to 100 million. Taking the mid-range at $90 million, and then backing out the $20 million most likely required to fund the phase IIb program, we arrive at a value of $70 million for Nile Therapeutics. This equates to a price of $2.00 per share.
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